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FundamentalsLevel–SkillsModule,PaperF5

PerformanceManagement September/December2015Answers

SectionB

(a)Targetcostingsteps

Derivingatargetcost

Step1:Aproductorserviceisdevelopedwhichisperceivedtobeneededbycustomersandthereforewillattractadequatesalesvolumes.

Step2:Atargetpriceisthensetbasedonthecustomers’perceivedvalueoftheproduct.Thiswillthereforebeamarketbasedprice.

Step3:Therequiredtargetoperatingprofitperunitisthencalculated.Thismaybebasedoneitherreturnonsalesorreturnoninvestment.

Step4:Thetargetcostisderivedbysubtractingthetargetprofitfromthetargetprice.

Step5:Ifthereisacostgap,attemptswillbemadetoclosethegap.Techniquessuchasvalueengineeringmaybeperformed,whichlooksateveryaspectofthevaluechainbusinessfunctionswithanobjectiveofreducingcostswhilesatisfyingcustomerneeds.

Step6:Negotiationwithcustomersmaytakecebeforedecidingwhethertogoaheadwit

ApplicationatCCoDifficultiesinimplementation

CCoisaservice tenmoredifficulttofindaprecisedefinitionforsomeoftheservices.Inorderfortargetcostingtobeuseful,itisnecessar Coactuallyprovidesarangeofservicesto ismeansthatthedefinitionoftheservicesbeingprovidedwillvary.Differenttargetcostswillneed erivedforthedifferentservicesprovided.

CCohastwotypesofviceforregularsisbeingrepeated,itshouldberelativelyeasytosetatargetcostforthesejobs.However,forthe nycomparativedataavailableandthereforesettingthetargetcostwillbedifficult.

Similarly,someoftheworkavailableisveryspecialist.Forexample,cleaningrestaurantsand noutb

offoodpoisoningwillrequirespecialisttechniquesandadherencetoasetofregulationswithwh notbefamiliar.Itmaybedifficulttoestablishthemarketpriceforaservicelikethis,thusmakingitdifficulttoderiveatargetcost.

BenefitstoCCo

Targetcostingisusefulincompetitivemarketswherea

acceptamarketpricefortheirproducts.CCoisoperatinginacompetitivemarketandwhilsttheserviceofferedbyCCoismorespecialist,itisclearfromtherecentdropinsalesthatpriceincreasesdoleadtolossofcustomers.CCocannotthereforeignorethemarketpriceforcleaningservicesandsimplypassoncostincreasesasithasdone.TargetcostingwouldthereforehelpCCotofocusonthemarketpriceofsimilarservicesprovidedbycompetitors,wherethisinformationisavailable.

IfaftercalculatingatargetcostCCofindsthostgapexists,itwillthenbedtoexamineitsinternalprocessesandcostsmoreclosely.Itshouldestablishwhythepricesoftheproductsituseshaveincreasedinthefirstce.Ifitcannotachieveanyreductionintheseprices,itshouldconsiderwhetheritcansourcecheapernon-chemicalproductsfromalternativers.So,targetcostingwillbenefitCCobyhelittofocusoncostreductionandconsequentlycustomerretention.

Note:Morepointscouldbemadeandwouldearnmarks.

(a)Calculations

Bus:(0·4x0·67)+(0·32x0·8)+(0·28x0·82)=75·36%Prime:(0·4x0·58)+(0·32x0·76)+(0·28x0·83)=70·76%

Express:(0·4x0·67)+(0·32x0·76)+(0·28x0·89)=76·04%

Accuracyofstatement

TheMD’sstatementsaysthatBusCo’scustomersarethemostsatisfiedofanynationalbusoperator.However,thisisnotquitethecasesince,whenthe‘overallsatisfaction’levelsarecalculated,Express’slevelis76·04%comparedtoBusCo’s75·36%.So,thefirstpartoftheMD’sstatementisuntrue.

TheMDthengoesontosaythatBusCoisleadingthewayonwhatmattersmosttocustomers–valueformoneyandpunctuality.Giventheweightingsattachedtothesetwocriteria,itappearstruetosaythatthesearethefactorswhiatter

mosttocustomers.Similarly,itistruetosaythatBusCoisleadingasregardspunctuality,being4percentagepointsaheadofPrimeandExpressonthiscriterion.However,giventhatExpressalsohasthesamelevelofsatisfactionasregardsofferingvalueformoney,BusCoisonlyleadingaheadofPrimeonthiscriterion,notaheadofExpress.Therefore,whilstitcansaythatitistheleaderonpunctuality,itcanonlysaythatitisthejointleaderonvalueformoney.

VFM

‘Efficiency’focusesontherelationshipbetweeninputsandoutputs,consideringwhethertheumoutputisbeingachievedfortheresourcesused.

Performancemeasure:

Occupancyrateofbuses

Utilisationrateforbuses(utilisationrate=hoursontheroad/totalhoursavailable)

Utilisationratefordrivers

(Manyotherscouldbegiventoobutonlyonewasaskedfor.)

‘Effectiveness’focusesontherelationshipbetweenanorganisation’sobjectivesandoutputs,consideringwhethertheobjectivesarebeingmet.

Possibleperformancemeasures:

PercentageofcustomerssatisfiedwithcleanlinessofbusesPercentageofcarbonemissionsrelativetotargetset

(Manyotherscouldbegiventoobutonlyonewasaskedfor.)

(a)VariancecalculationsMixvariance

Perquestion,totalgofmaterialsperstandardbatch=610g.Thereandardtytoproduce950units=950x610g=579·5kgPerquestion,actualtotalkgofmaterialsusedtoproduce950units=570·5kg

Material Actualty Actualty Variance Standard Variance

instandardmix

kg

inactualmix

kg

kg

costperkg

$

$

Whiteflour

570·5x450/610= 420·86

408·5

12·36

1·80

22·25

Wholegrainflour

570·5x150/610= 140·29

152

(11·71)

2·20

(25·76)

Yeast

570·5x10/610= 9·35

10

(0·65)

20

(13)

–––––– –––––– ––––– ––––––

570·5 570·5 20·5 (16·51)A

–––––– –––––– ––––– ––––––

Yieldvariance

Material StandardtyActualty Variance Standard Varianceinstandardmix instandardmix costperkg

kg kg kg $ $Whiteflour 450/610x579·5= 427·5 420·86 6·64 1·80 11·95Wholegrainflour 150/610x579·5= 142·5 4·86

Yeast 10/610x579·5= 9·5 9·35 0·15 20 3

–––––– –––––– ––––––

579·5 570·5 19·81F

–––––– –––––– ––––––

Alternativeyieldcalculation

570·5kgshouldyield(÷0·61kg)=935·25loaves570·5kgdidyield =950loavesDifference 14·75F

Valuedatstandardmaterialcost =14·75Fx$1·34=$19·77F

Materialyieldvariance

Threereasonswhyanadversematerialyieldvariancemayarise:

Themixmaynotberemovedcompleyoutofthemachine,leavingsomemixbehind.

Sincetheloavesaremadebyhand,theymaybemadeslightlytoolarge,meaningthatfewerloavescanbebaked.

Errorsorchangesinthemixmaycausesomeloavestobesub-standardandthereforerejectedbythequalityinspector.

Theloavesmightbebakedatthewrongtemperatureandthereforeberejectedbythequalityinspector.

Note:Manymorereasonscouldbegiven.

(a)WeightedaverageC/Sratio

Weightedaveragecontributiontosalesratio(WAC/Sratio)=totalcontribution/totalsalesrevenue.

Perunit: T C R

$ $ $ $ $ $

Sellingprice 1,600 1,800 1,400

Material (430) (500) (360)

Variablelabour(40%) (88) (96) (76)

Variableoverheads (110) (120) (95)

–––– –––– ––––

Totalvariablecosts

Contribution

(628)––––––

972––––––

(716)––––––1,084

––––––

(531)––––––

869––––––

Salesunits

TotalsalesrevenueTotalcontribution

420

$672,000

$408,240

400

$720,000

$433,600

380

$532,000

$330,220

WAC/Sratio=($408,240+$433,600+$330,220)/($672,000+$720,000+$532,000)

=$1,172,060/$1,924,000=60·92%.

Marginofsafety

Marginofsafety=budgetedsales–breakevensalesBudgetedsalesrevenue=$1,924,000

Fixedlabourcosts={(420x$220)+(400x$240)+(380x$190)}x0·6=$156,360k.Thereforetotalfixedcosts=$156,360+$55,000=$211,360.

Breakevensalesrevenue=fixedcosts/weightedaverageC/Sratio

=$211,360/60·92%=$346,947

Thereforemarginofsafety=$1,924,000–$346,947=$1,577,053.

2,500

2,000

1,500

Totalrevenue

1,000

Totalcosts

500

BEP

Fixedcosts

0

0

200

400

600

Salesunits

800

1,000 1,200 1,400

Costsandrevenues$’000

Multi-productbreakevenchart

Workings

Totalrevenue=$1,924,000

Totalvariablecosts=$1,924,000–$1,172,060=$751,940Thereforetotalcosts=$211,360+$751,940=$963,300

BEPifproductssoldinorderofprofitability

Ifthemoreprofitableproductsaresoldfirst,thismeansthatthewillcoveritsfixedcostsmor

thebreakevenpointwillbereachedearlier,i.e.fewersaleswillneedtobemadeinordertobreakeven.So,thebreakevenpointwillbelower.

(a)DivisionF

Controllableprofit=$2,645k.

Totalassetslesstradepayables=$9,760k+$2,480k–$2,960k=$9,280k.ROI=28·5%.

DivisionN

Controllableprofit=$1,970k.

Totalassetslesstradepayables=$14,980k+$3,260k–$1,400k=$16,840k.ROI=11·7%.

Inbothcalculationscontrollableprofithasbeenusedtoreflectprofit,ratherthannetprofit.ThisisbecausethemanagersdonothaveanycontrolovertheHeadOfficecostsandresponsibilityaccountingdeemsthatmanagersshouldonlybeheldresponsibleforcostswhichtheycontrol.Thesameprincipleisbeingappliedinthechoiceofassetsfiguresbeingused.Thecurrentassetsandcurrentliabilitiesfigureshavebeentakenintoaccountinthecalculationbecauseofthefactthatthemanagershavefullcontroloverbothofthese.

Bonus

Bonustobepaidforeachpercentagepoint=$120,000x2%=$2,400.umbonus=$120,000x0·3=$36,000.

DivisionF:ROI=28·5%=18wholepercentagepointsaboveminimumROIof10%.18x$2,400=$43,200.

Thereforemanagerwillbepaidthe

DivisionN:ROI=11·7%=1wholeThereforebonus=$2,400.

Discussion

ThemanagerofDivisionNwillbepaidafarsm useofthelargeassetbaseonwhichtheROIfigurehasbeencalcu thetotalassetsof

DivisionF.Thisislargelyattributabletothefactthat ntduringtheyear.If

thisinvestmenthadnotbeenmade,netassetswouldha DivisionNwouldhavebeen19·62%.Thiswouldhaveledtothepaymentofa$2 rthanthe$2,400bonus.Consequently,DivisionN’smanagerisbeingpenalisedform einthebestinterestsofhisdivision.Itisverysurprisingthathediddecidetoinvest,giventh ouldreceivealowerbonusasaresult.Hehasactedtotallyinthebestinterestsofthe,ontheotherhand,hasbenefittedfromthefactthathehasmadenoinvestmenteventhoughitisbadlynee isanexampleofsub-optimaldecisionmaking.

DivisionF’stradepayablesfigureismuchhigherthanDivisionN’s.ThisysapartinreducingthenetassetsfigureonwhichtheROIhasbeenbased.DivisionF’stradepayablesar blethoseofDivisionN.Inpart,onewouldexpectthisbecausesalesareover50%higher(nopurchases However,itisclearthatitisalsobecauseoflowcashlevelsatDivisionF.Thefactthatthemanag beingrewardedforthis,eventhoughrelationshipswith optimaldecisionmaking.

Ifthecontrollableprofitmarginiscalculated,itis18·24%fo N.Therefore,ifcapitalemployedisignored,itcanbeseenthatDivisionNisperf vision’sperformancelookworsebecauseofitsinvestmentinassets.Divi motivatedbyhiscomparativelysmallbonusand,inthefuture,he sehisbonus.

Managersnotinvestinginnewequipmentandt ithindustrychangesandaffectitsoverallfuturecompetiti

Tosummarise,theuseofROIisleadingt ood

forthemanagersisnotgoodforthe

actingforthebenefitofthebuttheothermanagerisnot.Thefactthatonemanagerisreceivingamuchbiggerbonusthantheotheristotallyunfairhereandmayleadtointhelongrun.Thisisnotgoodfortheparticularlyiftherecomesatimewhenthedivisionsneedtoworktogether.

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FundamentalsLevel–SkillsModule,PaperF5

PerformanceManagement September/December2015MarkingScheme

1

(a)

Targetcosting

Eachstep

1

–––

3–––

(b)

Targetcosting

Benefits–perpoint

1

Difficulties–perpoint

1

–––

7

–––

Totalmarks

10

–––

2

(a)

Calculations

2–––

(b)

Accuracyofstatement

Firstpartuntrue,Expresshashigher%age

1

Correctrewhatcustomersv